GST UPDATE ON ITC REVERSAL ON GOODS LOST DURING MANUFACTURING PROCESS

ITC reversal has always been a matter of dispute. A taxpayer obtains tax paid input used or intended to be used in the course or furtherance of business. ITC is availed on such input are required to be reversed in case of situations given under Section 17(5)(h) of CGST Act, 2017.The matter which arises here is whether ITC need to be reversed of goods lost, destroyed or damaged.
The said sub-section (5) of Section 17 ibid starts with following sentence “Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-…
The initial words “Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18” clearly imply that it is a ‘Non-Obstante Clause’. This means that the impugned clause empowers the sub-section to override the effects of any other legal provisions contrary to it. Thus, sub-section (5) of Section 17 overrides sub-section (1) of section 16 and sub section (1) of section 18. So, it can concluded that ITC on such supplies will be restricted even though the supply of goods or services or both are used or intended to be used in the course or furtherance of business. The sentence ends with the wordings “shall not be available in respect of the following” means ITC is restricted only in case of goods on which it is availed.

In case of loss of goods during the manufacturing process, there is no need to reverse the ITC on the same as per the recent ruling of Madras HIGH court in case of ARS Steels & Alloy International Pvt. Ltd. Vs State Tax Officer where Court held that loss by consumption of input is inherent loss in manufacturing process and it cannot be said to be covered by Sec 17(5)(h) ibid. Therefore, there is no need of reversal of credit on inputs lost during the manufacturing process. Many experts have hailed this positive ruling and it is rightly held also.

Thus, it is very good landmark decision but the dispute does not end here. Many experts have also difference on opinion on goods damaged by fire or other unavoidable reasons. They say that the wording used in Section 17(5) (h) is goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

It is said that there is difference in word “destroyed” and “damaged” The literal meaning of word “destroyed” means that nothing is left and is completely damaged. But word “damage” is weaker than destroyed. Something is left. We can clear it with an example, suppose, a building is destroyed with a Bomb. It means that it no longer exists. But if we say that it damaged then we will imply that some part of building say doors are broken but the building is still in existence.

Therefore, it is contended that there is difference between “destroyed” and “damaged”. When the inputs are completely destroyed then there is need of reversal of credit as per provision of Section 17(5)(h). But if the inputs are damaged only then there is no need of reversal. “Damage of inputs” implies that part of input can be used in manufacturing process or some value can be recovered from these inputs.

GST is new law and interpretations are subject to judicial pronouncements. These all issues will be settled in times to come. Let us wait and watch…

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GST UPDATE ON ITC REVERSAL ON GOODS LOST DURING MANUFACTURING PROCESS

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